[Ferro-alloys.com]The central bank will use unconventional monetary tools such as re-lending and pledged supplementary lending to maintain relatively loose liquidity, rather than turning to conventional tools including lowering interest rates or the reserve requirement ratio, said Zhu Haibin, chief China economist at JPMorgan Chase & Co.

The People's Bank of China has developed two or three monetary tools to guide short- and medium-term interest rates via an effective monetary policy transmission mechanism, said PBOC Governor Zhou Xiaochuan on the sidelines of the China-US Strategic and Economic Dialogue in Beijing on July 10.

Pledged supplementary lending, a lending instrument backed by collateral, is a new monetary tool to guide medium-term interest rates.

"Previously, the PBOC mainly relied on the adjustment of the reserve requirement ratio, re-lending, central bank bills and open market operations to adjust the money supply.

"Now, with the introduction of PSL, the central bank will tend not to cut the reserve requirement ratio. Instead, it will be able to increase money supply by using this new tool," said Zhu at a media briefing in Beijing.

The central bank is trying to avoid large-scale economic stimulus measures for fear these could lead to a debt crisis. A uniform RRR reduction for all banks may cause money to flow into the housing sector and local government financing vehicles.

"The PBOC is becoming increasingly reliant on innovative monetary tools. It's trying not to adjust interest rates or the reserve requirement ratio, because these aren't good measures to control the direction of capital flows. So the central bank is putting greater emphasis on targeted adjustment by using tools like re-lending and PSL," Zhu said.

As PSL requires collateral, the PBOC is likely to use this method to provide targeted support to certain industries and projects such as promoting affordable housing construction, he said.

China Development Bank Corp received a three-year PSL facility of 1 trillion yuan ($161 billion) from the PBOC. The money will be allocated to the housing finance department of the nation's largest policy lender, China Business News reported on Monday.

An unidentified source told the Beijing-based newspaper that China Development Bank received low-cost, targeted funding from the central bank at an interest rate below 6 percent. Earlier this year, the central bank re-lent 300 billion yuan to CDB to finance urban renovation, the paper reported.

Zhu said the PBOC has taken China's financial policy and economic restructuring into consideration while formulating monetary policy. But in the long run, monetary policy should focus on controlling inflation, maintaining financial stability and implementing financial reform, rather than taking on other tasks that are irrelevant to the functions of the central ban

• [Editor:Mike.zhang]